Phorm: How it went down

Analysis For a company without customers, users or revenues it's pretty extraordinary that Phorm achieved the dubious distinction of being the biggest UK technology story of the past 18 months.

It couldn't have done it on its own, of course. As it slinks away from the UK market this week, investors can thank BT executives, alongside the firm's own, as joint architects of its failure.

And a failure it now surely is. With closest partner BT effectively telling Phorm "you're on your own", and TalkTalk swearing off its agreement altogether, the firm is effectively finished in this country, at least for the forseeable future.

CEO Kent Ertugrul now faces the unenviable task of rebuilding the business overseas, starting in South Korea, where it is running trials of its web monitoring and profiling system with Korea Telecom. BT is left to reflect on what its former press chief described as "a year of the most intensive, personal-reputation-destroying PR trench warfare".

The energetic campaigners against Phorm have rightfully claimed their joint failure as a victory. To a facetious observer, the firm's assertion to investors that it is "extremely encouraged by the fact that BT has stated that privacy was not a factor in their decision making" is comical. We've long known privacy was not a factor in BT's decision-making over Phorm - that's how the pair ended up in the mess they did.

But the line collapses under even the most cursory scrutiny.

Perhaps Phorm is indeed "extremely encouraged" by BT's statement, but we suspect its investors are not. If, as implicitly claimed, BT believes Phorm has won its year and a half battle over the legal and ethical implications of its technology, then it must have drawn the conclusion that the business opportunity was simply not good enough. Any company extremely encouraged by such an assessment ought to lay off the happy pills.

Alternatively - and call us cynical - BT's claim that it was dropping Phorm simply to concentrate on next generation network rollout seems questionable.

The Phorm project was part of BT Retail's "value-added services" unit. Its director Emma Sanderson was fed to telly news when we broke the story of the secret trials last year (El Reg was repeatedly denied an interview at the time. The invite remains open...).

Network upgrades and the nationwide logistics involved are meanwhile the responsibility of BT Openreach. The idea that shutting down a relatively low capital, small project (the brunt of the costs were borne by Phorm, or its investors at least) will help a separate division of BT - one legally separate from the rest of the group on antitrust grounds - deliver a multibillion pound infrastructure upgrade is derisory.

Multiple sources have told The Register throughout that the hit to BT's reputation caused by the Phorm controversy made Retail quite unpopular with other divisions.

So BT and Phorm's clumsy attempt to apply lipstick to their latest news pig - a consistent failing of the disastrous PR efforts surrounding the whole project - on a basic level either backfired or should've been dismissed.

On a more sophisticated level, however, the truth of BT and Phorm's separation is unlikely to be a simple capitulation to consumer concerns. It's a convenient and familiar narrative for journalists, but unsatisfactory given the determined personalities and powerful interests involved.

We've heard testimony this week from BT insiders that a good deal of the silence and delays on the Phorm project was a result of engineering problems, not concern for customer privacy. Put simply, the system could not be made to work. Despite Phorm's claims soon after its launch that it could process and categorise user traffic on the fly, testing in the real world said otherwise, one source revealed. Significant slowdown was measured when the deep packet inspection probes were switched on.

This problem sent Phorm back to the drawing board, to return with an "offline" version of its system, which would analyse a copy of each user's data stream. it's unknown whether this approach was successful.

As well as technical problems, our sources report continual internal debate over the legal status of the technology, contrary to public statements. Towards the end, we're told, a great deal of effort was made by BT lawyers to draw up a contract that would insulate it from any liability if website owners or consumers were to mount a legal attack.

Indeed, a large chunk of the tens of millions of pounds raised by Phorm has ended in the pockets of pricey corporate lawyers.

This reporter ran into Phorm CEO Kent Ertugrul at a party held at the offices of one such firm of pricey corporate lawyers in May last year. It was the second time we had met. The first was in the early days of the story, when he gave us this interview.

Our most recent encounter was at the Palace of Westminster, when Ertugrul angrily brandished a print out of the cookies dropped on readers by The Register. That was moments before he tried to shout down Sir Tim Berners-Lee, the Greatest Living Briton™, across a parliamentary committee room.

Journalist colleagues and industry figures we've spoken to agree he's a difficult man to like. According to people with direct knowledge, Ertugrul is a difficult man to work with, too.

The Register has spoken to some who worked for Phorm. Around the time of the pre-Christmas purge, when half the board were forced out by Ertugrul, along with many support staff, one described the atmosphere as "hellish". The report was corroborated by staff from other parts of the business.

If not people skills, Ertugrul however undoubtedly has a gift for raising cash, which Phorm has needed a lot of. A glance at the firm's top brass, past and present, bears testimony to his connections in the banking world. But frequent public missteps outweighed the benefits to Phorm brought by Ertugrul's financial friends.

First, and probably acting on terrible advice, he sanctioned PR agencies to swarm the web, pasting boilerplate defences of Phorm's technology anywhere it was mentioned. The price the firm paid for such "social media" expertise is unknown, but one Reg PR acquaintance joked last year that "everyone wants a bit of it!". As far as we know, Phorm engaged up to five PR agencies at one time.

Throughout the affair, Ertugrul's personal public statements dripped with unappealing hubris. There was his assertion that BT would "most definitely" rollout the system by the end of 2009, for example. It never seemed likely.

Things took a darkly comic turn recently with the launch of the Stopphoulplay.com site, which instantly backfired and led commentators to publicly wonder how long the firm had left. The brainchild of ex-Aitken, ex-Goldsmith and ex-Pinochet flack Patrick Robertson, the disastrous attempt at rebuttal is surely destined for the how-not-to-do-it section of PR textbooks, should such volumes exist.

Phorm tried very hard to make its case, but none of its arguments convinced the public. Implicit claims its technology was a Good Thing because Google is powerful were like asking everyone to swallow a spider to catch a fly. The simple fact is, Joe Public has no compelling reason to care that ISPs operate on thin margins and no reason to care if advertising is poorly targeted.

To take something from him - his data - Phorm had to offer something in return. "Webwise Discover", its content targeting service, was far too little far too late.

The worst misstep of all, of course, was his agreement to conduct trials in secret with BT. Ertugrul can scarcely be blamed for that however, as TalkTalk demonstrated when it followed BT away from the table this week. Without BT he had nothing, and without secret trials, he wouldn't have had BT.

They might have gotten away with it, if it weren't for the pesky kids of HM Government. If authorities including the Home Office and Information Commissioner's Office hadn't effectively acted as taxpayer-funded consultants on the project, they might have been in a reasonable position to deliver a slap on the wrist. Instead, those authorities now face the scrutiny of the European Commission, which has initiated formal legal proceeding against the UK government for failing to properly implement EU privacy laws.

Phorm quite reasonably adopted the strategy of distancing itself from the legal action, emphasising the implementation of law was a matter for authorities. But the cosy relationships between Phorm and BT, regulators and government that eventually stirred Brussels, exposed by Freedom of Information requests, mean it is inextricably and damagingly linked to the proceedings. Phorm won't admit it, but the link on its website to an advertising industry lobby group press release appealing for the action to be dropped does so tacitly.

The firm may yet mount an against-the-odds return to the UK, perhaps in a couple of years, perhaps longer - it has cash on its books to be getting on with. What is certain is that someone will attempt something similar in future.

For El Reg, the positive thing to draw from this saga is not that Phorm lost business. Rather it's that the next party to try to monitor internet connections on behalf of commercial interests won't trial technology without consent, is unlikely to receive legal consultancy from government officials and might actually get into trouble if it breaks the law. ®